Better Than Average Investors

You can be better than the average investor with some help, discipline and patience.

Every year around this time Dalbar releases the findings of their yearly research on investor behavior which consistently shows the average investor earns below-average returns. Dalbar Inc. is a company which studies investor behavior and analyzes investor market returns.

The study looks at the average annual return of stock (and fixed income) investors over the previous twenty years and compares it to the S&P 500 Index, an unmanaged broad group of US stocks generally regarded as a good proxy for the US stock market.

Study after study has shown that when the stock market goes up, investors put more money in it (think buying high). And when it goes down, they pull money out (selling low). This irrational behavior causes the average investor’s stock returns to be substantially less than the returns of the market as a whole. What would cause investors to exhibit such poor judgment? 

The problem is that we humans are emotion beings and often overreact to current news reports.  We become over confident when the recent past has been good to us and this overconfidence can cause investors to exaggerate their ability to predict future events. They are quick to use past data, and to think they have above average abilities that enable them to predict market movements into the future.  Then, when markets decline we become fearful and anxious leading many to sell thinking better get out now and that somehow they can “protect” their money only to miss the inevitable turn around and recovery. 

So just how can you avoid becoming a “Dalbar” statistic and earn more than the average investor? 

Wisdom from King Solomon recorded in the book of Ecclesiastes chapter 11 suggest we do two things.  First, take prudent appropriate risks and second, diversify into seven or eight portions for you do not know when trouble will hit (not if, but when).

As investment advisers we apply the wisdom of Solomon helping our clients first determine just what is prudent appropriate risk for them and then build a portfolio that diversifies their money into multiple asset classes to help them achieve that right risk-reward combination.  Once a prudent strategy is built we are here to help our clients stay the course, including helping them avoid falling prey to the emotions of fear in falling markets or greed in exuberant ones.

In this way  you can weather the storm of market ups and downs that over time we are confident will help you be “better than the average investor” and earn above average returns. - Let us know if we can help. 

*Dalbar’s Quantitative Analysis Of Investor Behavior study